Readmission and Hospital Quality under Prospective Payment System

Nowadays different healthcare policies in OECD countries seem to consider hospital readmissions somehow “quality dependent”. Nonetheless, the theoretical literature on the incentives provided by payment systems tend to disregard this aspect, which indeed might be relevant in driving providers’ behaviour. In this paper we study the incentives for hospitals to provide quality and cost-reducing effort under different payment regimes, either a global budgeting or a prospective payment system, considering explicitly the role played by financial incentives directly linked to readmissions. As far as the specific results about quality are concerned, we find that prospective payment systems do not necessarily perform better than retrospective systems if the reimbursement to hospitals is not adjusted to take into account specific outcome-based indicators of quality, such as readmissions. More specifically, if patients readmitted are fully paid to hospitals, moving from a retrospective to a prospective payment systems might even induce a reduction on quality and, in turn, an increase in readmission probability. However, if the prospective payment system is adjusted for internalizing this counter-incentive, by a different payment for patients readmitted, it could be able to foster a higher treatment quality through the competition channel.